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Why Pipeline Politics in Central Asia are a Boon for U.S. Investors

by | published January 30th, 2012

Right now there's major pipeline battle going on – one that will have a profound impact on the future of American energy production.

And I'm not talking about the Keystone Pipeline.

In fact, this underreported story is happening in a place that few Americans energy investors would be able to locate on a world map.

But what happens there will have a real impact on their investment portfolios – for the better.

You see, recent moves by Russia, Iran, and especially China have just improved U.S.-based energy prospects. That's why today we're going to focus on one country many people haven't heard much about before: Turkmenistan.

And we're ready to capture some profits from it.

Land-Locked and Loaded With Fuel

These developments center on the Caspian Sea basin and the Central Asian country of Turkmenistan, in particular.

The Caspian Sea is one of the two last major new sources of oil and gas on the globe. The other (the Arctic Circle) is less accessible and much costlier to develop. So this is an important oil and gas center. (As you can see on the map below, the hub of the activity is just north of Iran.)

Five countries land-lock the sea (the so-called “littoral,” or shore, states): Iran, Russia, Azerbaijan, Kazakhstan, and Turkmenistan.

When access to the Caspian was last the subject of a treaty in the 1940s, only two countries took part in the process – the first four current states were then all part of the Soviet Union.

Much has changed.

Aside from politics, the discovery of huge hydrocarbon reserves has fueled new international interest in this part of the world.

A New King in Natural Gas

Located on the eastern coast of the Caspian Sea, Turkmenistan has one of the top four reserves of conventional (i.e., free standing, not shale) natural gas in the world.

Of course, if it is going to sell all this natural gas, the country needs pipeline access to the major consumer markets.

And that brings the intense political nature of these matters into view.

Throughout the Soviet period, and until very recently, Russia provided that access, with a bit of creative accounting on their part.

What actually happened was that Gazprom, Russia's dominant company and the largest gas outfit in the world, bought Turkmen production at a discount for local use. This would free up Russian-produced gas for export (mainly to Europe), which they sold at a higher price than the gas they had purchased.

Clever, huh?

Now, the Turkmen government in Ashgabat (led by a president with an unpronounceable name – Gurbanguly Berdymukhammedov) has sought to diversify its export corridors, making the country less dependent on Moscow for its entry into the world market.

Matters reached a head almost two years ago – on April 9, 2009.

On that day, an explosion rocked the major pipeline crossing Turkmenistan. This was the primary gas conduit in the entire region, and despite being inside the country, it was run by Russian Gazprom.

Turkmenistan accused Gazprom and Russian engineers of purposefully creating this pipeline explosion in order to disrupt gas exports. Russian experts, in turn, blamed Turkmen negligence and the country's worn-down infrastructure. Tensions only escalated from there.

In response, Turkmenistan suspended all sales to Russia and then immediately began making earnest moves to send its gas elsewhere.
The result was a huge pipeline project stretching from major fields in the eastern part of the country, across Kazakhstan and Uzbekistan, to… China.

The Turkmens have also committed additional exports to neighboring Iran (despite having huge natural gas reserves of its own, the northern portion of Iran is not connected to the main fields in the south), to source a new pipeline moving through Afghanistan and Pakistan to India, while also saying they will provide volume directly to Europe.

This last ingredient has stoked the fires of politics in the region. To supply the highly desired European market, Turkmen gas must connect to pipelines in Azerbaijan, and then on to Turkey. And to do this, a new pipeline must be laid on the Caspian seabed (the Trans-Caspian Gas Pipeline, or TCGP).

Now the legal status of the Caspian, along with how the individual states can access its open waters and raw materials, has been the single biggest disagreement among the five littoral states.

The proposed pipeline would connect Turkmenistan and Azerbaijan, and it has the approval of both countries, as well as support from the U.S. and the European Union (EU).

These two countries claim they need only their own approval for a project involving only them.

Yet Russia, Iran, and, now, Kazakhstan adamantly oppose the TCGP. These three argue that no pipelines should be allowed under the Caspian without the consent of all five countries that border the sea.

And matters have heated up even more now that China is involved.

China Opposes the Caspian Pipeline

Late last year, Ashgabat and Beijing signed a new agreement to increase the flow of Turkmen gas to China. The new amount, to be phased in after pipeline upgrades, would reach 65 billion cubic meters a year, only slightly less than what Turkmenistan has agreed to sell Russia (68 billion annually).

The last thing China wants is for Turkmenistan to sell its gas independently to Europe.

The price there is considerably higher, and that would allow Ashgabat to claim a prevailing higher rate in negotiations over prices with China.

China, therefore, is now supporting the Russian-Iranian-Kazakh position on TCGP.

This puts the E.U. in a difficult spot. It cannot simply entice the Turkmens with higher prices because it may well cost Ashgabat strained relations with a rising dominant trading partner (China).

Turkmenistan must also concern itself with a possible Russian naval response. The other four Caspian littoral states have the all-too-recent example of Russia's military move into neighboring Georgia on August 8, 2008, to remind them of the country's strength.

For them, it is an all too recent example that could be repeated in their backyard.

Turkmenistan, therefore, needs to tread carefully. This means a likely delay in supplying the European markets.

It means something else, too…

A Boon for American Investors

As I noted on Friday, the prospects of exporting U.S. shale gas to the European market as liquefied natural gas (LNG) is extremely promising.

Europe requires new sources of natural gas in order to offset its primary energy security concern – over reliance on Russian pipeline gas.

Europe had hoped to acquire some of that Caspian production. Now, the alliance between China and Russia against the TCGP makes this more difficult.

It also furthers the likelihood that Europe will be accepting accelerating steams of LNG from the U.S. as a ready alternative…

Which is great news here in the United States.

So, thank you, Moscow and Beijing!

Your gracious assistance has improved the bottom line prospects of U.S. shale gas producers… and their happy investors.

Sincerely,

Kent

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Darryl Groothuis
    January 30th, 2012 at 15:09 | #1

    What about STO suppling Europe with LNG don’t they have enough capacity to supply them

  2. William E. Wiltse
    January 30th, 2012 at 15:19 | #2

    Appreciate the information clearly and concisely stated. Also very much appreciate not presenting in video format; largely boring, focused on your folks who read poorly, and, worst of all, time consuming.

    Thanks, and keep up the good work.

    WW

  3. Robert Eisenstadt
    January 30th, 2012 at 15:23 | #3

    Dear Dr. Moors,

    An excellent piece of writing – the political and economic situation is clearly and logically presented. A good story, well told.

    Much appreciated.

    RE

  4. Fred Kern
    January 30th, 2012 at 15:34 | #4

    Dear Kent,

    After a recent meeting concerning LENR I note that you have not said anything about this truly world changing technology that will replace oil as a supplier of heat, relegating it as a feed stock to the chemical industry, and similarly for natural gas. While for years this technology, formerly called Cold Fusion, had a lot of nay Sayers, it is now clear that reactions do work and provide very low cost heat energy, even if not completely understood on the basis of old school physics. Since the amount of “fuel” needed is comparable to nuclear fuel these processors do not produce radiation, making the system likely for use to power aircraft as well as to run power stations with clean, non carbon emitting operation. Units providing from 5 kW and up are nearing market introduction. This could have a negative effect on both utilities as well as the pipeline companies of which I am a major investor currently. Your thoughts would be appreciated.

    Sincerely,

    Fred

  5. Dr Bill
    January 30th, 2012 at 15:50 | #5

    Regarding your article, “Why Pipeline Politics in Central Asia are a Boon for US Investors,” so where is the greatest ROI: LGP companies, distributors, shipping, terminal operators? Great article. Thanks.

    Bill

  6. andy molina
    January 30th, 2012 at 16:09 | #6

    Please remind yourself that Europe cannot pay their own bills and future gas contracts between the US & Europe will result in additional US debt as a resut of derivative swaps in energy b/c we all know how well the swaps market has helped the US banks and the taxpayer. Just the thought of trying to defend the construction of a pipeline under the Caspian is monumental – there is no way that Russian naval forces would allow this whether they are manned by Russians or Iranians. Ask Fluor Corp. how they are going too defend the plant ey are building south of Jabil never mind entering in waters that the Russians think is their doormat. You even mentioned their incursion into Georgia and Azerbijian in this article – did you forget about the prowess of the Russian Navy in the Caspian – the greeks and the Israelis are having difficulty in the Med drilling b/c Turkey is claiming it.
    The resources in the steppes have and always will be the sovereign bastion for Asia and not the West. Desire on the part of the West to benefit from these resources is a plan for failure; the additional oil production in Iraq as a result of 10 years of conflict burdened by US forces has resulted in the lion’s share of the output going to the chinese, India, Japan.
    And the band played on.

  7. Len
    January 30th, 2012 at 16:24 | #7

    I’d be interested to understand the high-level economics of the US LNG opportunity in Europe. What is the cost differential between US LNG after being transported to Europe vs that of Russian gas piped to Europe? I realize that for Europe it’s more than just about cost – they want diversity of supply as well, but it would be interesting to understand the relative costs of these 2 sources. Thx

  8. FC
    January 30th, 2012 at 16:26 | #8

    The US will never put at risk it´s future self-sufficiency on US shale gas, they won´t export it nor to Europe nor to Japan. But they need Iran (Which is the only country where they can find or fabricate excuses for invading and controlling hydrocarbons. This era is the oil & gas cold war. How can they give up the oil and gas control to it´s rival Russia? No way. Think beyond…..

  9. January 30th, 2012 at 17:47 | #9

    Kent, great info, thanks for the heads up. I wish I listened to you on LNG at 8.00. Wonderful call.

  10. January 30th, 2012 at 18:06 | #10

    Very good article. Clear and concise and I agree with an earlier comment that I prefer clearly WRITTEN articles rather than video presentations which are boring and take too much of my time.
    Congratulations but what US companies stand to benefit most from this situation?

  11. roy wong lun hing
    January 30th, 2012 at 20:25 | #11

    A very intelligent and precise analysis
    Ambassador Roy M. Wong Lun Hing

  12. roy wong lun hing
    January 30th, 2012 at 20:26 | #12
  13. Bernard Durey
    January 30th, 2012 at 21:22 | #13

    Well,it very well could be a real hot spot for investors in the pipeline industry. It could be great for foreign policy or could be the master plan or peice of the master plan for the oil blackmail to take place. We still dealing with sanctions on Iran due to our best people thinking they are building weapons of mass destruction in the nuclear power industry. We had a scenarion in South America with Venzulea and I believe two American oil companies with almost no way out. And Mr. Chavez was and/or isn’t one of Americas favorite people. Although he had become almost politcal bed partners with Russia and Iran in developing the nuclear power,etc. So wait and see I guess.

  14. Norman Selby
    January 30th, 2012 at 23:57 | #14

    What about the wells throughout USA that “went dry” and have lain dormant for 35+ years? Is there modern technology to quicken the latent oil to be extracted from these wells? They have already been dug – simply use current expertise to draw the oil out.

  15. Andrew
    January 31st, 2012 at 06:07 | #15

    Why doesn’t the U.S. Military just make up some ridiculous excuse to take over Turkmenistan (like they did in Iraq and Afghanistan) and run a pipeline through Afghanistan and Pakistan? I thought that was the primary reason for our invasion of Afghanistan.

  16. Robert Berke
    January 31st, 2012 at 10:07 | #16

    There are two reasons that the US military won’t ever take over Turkmenistan: Russia and China.

  17. Louis Sack
    January 31st, 2012 at 12:22 | #17

    I hold some investments in the Canadian Oil Sands. However I am losing money on these since they do not reflect the increase in the price of oil. I do receieve fair dividend from these but am not sure if I should hold or sell. The holdings are: Bonavista (bnp),Enerplus (erf) and Penwest Petroleum (pwt)
    Your advice will be appreciated.
    Thank you.
    Louis Sack

  18. john tonne
    January 31st, 2012 at 16:29 | #18

    good question re: oil sand holdings

  19. enthusceptic
    February 10th, 2012 at 18:00 | #19

    So right on, FC, dirty geopolitics are in full swing here!
    Any more news on a pipeline from Russia to China?
    The US Military can’t solve all problems.

  20. enthusceptic
    February 10th, 2012 at 18:24 | #20

    I have discovered a way to read instead of watching video: On my computer – using Google Chrome, but it probably works with any browser – when I close the video presentation, the computer asks if I want to leave the page or stay. I click on “stay”, and hey presto, the readable version is there!

  21. enthusceptic
    February 10th, 2012 at 18:38 | #21

    Western Europe may need small or great quantities of LNG from North America, but large parts of the rest of the world need LNG imports. My message to NA is: Export, baby, export!

  22. enthusceptic
    February 10th, 2012 at 18:59 | #22

    Any info about which companies own, build or run LNG export terminals in NA and own, buy or build LNG ships would be welcome.

  23. enthusceptic
    February 10th, 2012 at 19:13 | #23

    What in the world is LENR?

  24. enthusceptic
    February 10th, 2012 at 19:22 | #24

    Most or all STO oil and NG is probably already going to Europe, but the company may be interesting because of involvement in Central Asia.

  25. Cheryl
    February 11th, 2012 at 01:34 | #25

    I am selling all LNG, they will not profit for a long time and I am moving all cash to a annuity.

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